I have heard some questions about the recent “trade war” and its effect on international equities. We still remain bullish on international and emerging market equities in the long term. We still believe that they have a longer runway than US equities.
Avoiding the home country bias and including international and emerging market equities in your portfolio not only provides the possibility for greater returns, but also provides needed diversification. In the 2008 financial crisis, equities had a higher correlation than they do today. In other words, all equities were going down. However, as the chart below shows, global equity correlations have decreased quite a bit since that time.
We believe that non-U.S. stocks will be able to keep up the pace of economic growth longer than US stocks. They are behind us in the economic cycle and have more room to grow. The growth of the middle class in many emerging markets economies has been substantial and is on track to continue, which will positively affect growth for those stocks with exposure in those countries.
Valuations also point towards international outperforming US equities. The chart below shows that US is currently in line with the 25 year average price-to-earnings ratio. Non-US equities, however, are all below the 25 year average suggesting that these stocks will experience more growth to get in line with historical norms.
The strengthening of the US dollar has been a contributing factor in the underperformance of internationals this year. We expect this to reverse, which will be beneficial to international stocks. Although the talk of tariffs and trade war has been front and center in the news, we don’t expect that it will have a long term effect on the markets. Headlines have caused some downward pressure, but nothing to be concerned about long term.
As always, please feel free to contact us with questions.
Maeve Beard, Senior Vice President, Director of Investment Support
Maeve Beard serves as Senior Vice President, Director of Investment Support at Pinnacle Trust. You can reach her by calling the office at 601-957-0323 or by emailing her at email@example.com.